Dueling Fools
A Kodak Moment
April 7, 1999

Kodak Bull's Rebuttal
by Paul Larson ([email protected])

Am I the only one who senses that my associate Bill has a bone to pick with Kodak? I guess it's always easier to point out what is potentially wrong with something than to explain what is right. Plus, how one views Kodak is all a matter of perspective.

The first point Bill talks about is the company's declining sales. With the company selling off businesses external to its core focus, it is little wonder total sales have shrunk. It should not come as a shock that sales decreased during the company's downsizing.

If the past is relatively irrelevant, I think it's safe to say the far past is even more irrelevant. Yes, Kodak did slightly reduce its dividend in 1993 and 1994. But what Bill fails to mention is that the company actually raised its dividend in each of the last two years, and further increases are not out of the question given the record profitability of late. Like I said, it's all a matter of perspective.

Bill is correct to point out that margins are down from 1991-1993, but he again fails to mention that gross and operating margins have also been increasing the last two years. Are margins down over seven years or up over the last two? Perspective is an amazing concept. It's also worth noting that earnings last year were the highest they've been in ten years, and the company's net margin is also at a record level.

Of course, things are not entirely roses up in Rochester, but there are several mitigating factors. Probably the largest of these is the strong dollar versus the Japanese Yen. The currency situation has allowed Japanese importers, Fuji included, to sell goods at a lower price both here and abroad. The strong dollar has also hurt Kodak overseas because the situation has made American goods more expensive. Long story short, currency translations alone caused a 3% decline in sales, and losses in market share can be blamed here, too. Kodak is certainly poised to benefit when the economic and currency situations abroad normalize.

Bill also pointed out the nasty price wars that are ongoing with Fuji in the film market. It's interesting to note that Kodak was still able to increase its net margin last year even though it was entangled in this battle. Credit the company's cost reductions and increased efficiency for being able to maintain and grow margins during this period. Look no further than this point to see how Kodak has trimmed down and is now a leaner and meaner competitor.

Then, of course, there's the argument that film will soon be obsolete at the hands of digital cameras. While I don't doubt digital will someday overtake the traditional film market, silver halide is still the only route to go when quality and cost are of utmost importance. Digital cameras in the mainstream are coming, but it will be later rather than sooner. Plus, there is still plenty of time to harvest the profits from the traditional film market.

Kodak isn't stupid, and it has been heavily investing in research and development of products for the digital future. The company has spent $3 billion on R&D over the past three years, most of this earmarked toward the digital market. Who today is one of the largest suppliers of digital cameras and projectors? A revolution is indeed coming, but Kodak is more than prepared.

I mentioned the Foolish Four in my initial argument because Kodak appears to be the quintessential dog of the Dow. The stocks that end up on the list almost always have bad news surrounding them that Wall Street has discounted far too heavily. With its low valuation, clearly many think along the same lines as Bill. Nevertheless, I think that Kodak will continue its tradition of innovation to meet the challenges down the road. Whatever form pictures are taken, stored, and viewed in the future, it is a safe bet that Kodak will continue to have a major presence.

Next: The Bear Responds